Business Insight 110 – The Perils of Assigning Leases (blog & vlog)

 

I had been on some management training courses – one was all about the art of delegation and ‘letting go’. Our Hastings showroom’s lease was renewed and it was in desperate need of refurbishment generally, and new displays. My manager was ‘Barmy’ Mark Barrett; he was given the task of coming up with a design and schedule of works for the entire project. “What me? You are asking me – are you mad?”

He was told to get on with it. Mark was an excellent sales manager and salesman, and well-liked by his team and popular in the company generally; he wasn’t famous for being the most organised though.

My brother comes to see me: he tells me that the Hastings showroom is a pile of rubble with one electric light bulb, and the long-suffering receptionist sitting at the back answering the phone. The salesmen (if present) are in the basement out of the mess, but it’s a disaster.

Then, during the period (weeks) that the showroom was in this state, two unexpected things occurred: the first was that the sales went up, and the second was that the service (remedial) requests came down.

The explanation was simple to both: the salesmen weren’t able to doss around the showroom so worked instead (i.e. door knocking and other proactive things; visiting their customers and trying to get add-ons or recommendations). Secondly, when existing customers turned up to log a complaint, they were confronted with a shop looking like a building site and thought that we had either moved, or were shut. If really worried they phoned HQ, where they were dealt with by us sending out the request for £23 and a form to describe their problem (with an explanation as to why their cheque would be banked if it wasn’t genuine service work).

Our Tunbridge Wells shop was taken back by our landlord, an insurance company that was expanding into estate agency. (There was a property price boom at the time and everybody wanted to be an ‘Estate Agent’). A bit further down the road, we found a double-fronted shop which was being let by its owner, the butcher that used to trade there. Terms were agreed on a new lease (with no premium to pay), with a rent-free period for all of the work necessary to convert it from a butchers to a double glazing showroom .

Martin Cheshire and I drove up to see if we could come up with an interesting new idea, perhaps a take on estate agents – where the houses we had done would be featured in the shop window ‘Estate Agent’ style, with the price of the window and door job instead of the price of the house. Geddit?

Martin wasn’t convinced. We talked about the debacle that had been (and was still) Hastings, and the fact that sales had gone up. I said “If I had my way I’d shut the lot down!” Once the words had left my mouth, they took on a life of their own.

Everest had never had shops (or the local upstarts M&M), and they were as common as muck now. They cost a fortune to rent and staff, and the upkeep was equally crippling; we could save tens of thousands and have a bigger and more proactive marketing budget. We would probably get more, not less, sales, and be more profitable. As we drove back to Eastbourne, we (Martin and I) got more and more excited.

We had never managed to have eleven good showroom managers at one time; indeed, with 4 of our shops, we had never had a single good manager full stop. Our business model had run out of steam – time to rethink the business of the future.

Our bank manager had recently said we should look to our overheads, because if another stiff wind blew up ahead we had no ‘fat’ any more (having sold our biggest asset) to see off the storm.

A board meeting was convened off-site. We hired a meeting room in a local hotel and the bomb was dropped on our fellow directors: “I want to shut down our showrooms and exist Everest style”.

Bob Reid was in first: the bad years had sent me off my head, where would the salesmen go, the customers would think we’ve gone bust – it was ridiculous.

I was prepared for this: a document showing the Hastings showroom sales in the 3 months immediately prior to Mark Barrett’s disaster, compared with the sales for the 3 months his ‘refurbishment’ was happening. Not only were they substantially higher, the mix was better (i.e. more self-generated sales, add-ons, and recommendations because the salesforce had worked and not relied on company generated leads!!!).

We would still have the 3,000 sq. ft. office HQ, plus the Lewes and Ashford depots (all of which had available office space for meetings, telesales etc. and would save a fortune). I had worked out that with Bill’s (still ongoing) Crawley Odds contract, worth £40k a week, we would probably only need a further £20k of retail to break even.

That’s £40,000 worth of business we didn’t have to get to pay the rent, rates, staffing and running costs of eleven showrooms – and in truth, we would probably do the same business anyway.

The accountant was asked to do a thorough analysis, and there would be no discussion other than amongst ourselves; we would reconvene once he had done his work.

It was confirmed: our break even point would drop dramatically, and if we carried on with the same advertising budget but the salesmen bought in more self-generated business as well, our profitability would go through the roof.

It was voted through but not unanimously – Bob Reid and my brother were not convinced. A plan was hatched: Bob Reid’s brother Mike (a chartered surveyor) would go round and do a valuation, and the staff would be told that it was for insurance purposes (they knew Mike as we had used him to find the shops originally). We still had the two freeholds in Bexhill and Crawley; the rest were leasehold but in prime positions and would be sought after, and should attract premiums for assignment. We would actually shut them at Christmas and start the new year afresh.

As previously stated, everybody wanted to be an estate agent – virtually every shop was sold to one financial institution or another investing in that sector, or to existing estate agents. Even the new Tunbridge Wells showroom, which was still an empty butcher’s shop, sold at a premium -we accepted £60,000 for the benefit of somebody taking the rental liability and full repairing lease off of our hands.

INSIGHT 110:- When you assign a business lease, you are still responsible for the rent if the company or individual you sell it to, goes bust or doesn’t pay it. This is why it’s imperative to get a good covenant if you sell – all of ours were large PLCs, so we never had a problem with them ‘pinging’ back to us.

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